Essential Utilities (NYSE:WTRG) Q2 2020 Earnings Call

0:00 Good day and welcome to the Essential Utilities Q2 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Dingerdissen. Please go ahead, sir. Good morning, everyone, and thank you for joining us for Essential Utilities Second Quarter 2020 Earnings Call. I am Brian Dingerdissen, Vice President, Chief of Staff, Investor Relations and Communications. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website. at essential.co. The slides that we will be referencing in a webcast of this event can also be found there. Here's our forward-looking statement. As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risk, uncertainties, and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements.

0:53 Please refer to our most recent 10Q and other SEC filings for description of such risk and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures. A reconciliation of these non-GAAP to GAAP financial measures is included at the end of the presentation and also posted in the Investor Relations section of the website. After the presentation, we will open the call for questions. For our agenda for today, we will start with Chris Franklin, our Chairman and CEO. who will discuss highlights from the year to date and provide an update on our people's leadership team. Dan Schuller, CFO, will then discuss our financial results. Dan will be followed by Matt Rhodes, EVP of Strategy and Corporate Development, who will provide an update on our municipal acquisition program.

1:40 Finally, Chris Franklin will conclude the call and then open the call up for questions. With that, I will turn the call over to Chris Franklin. Hey, thank you, Brian, and good morning, everyone. It's hard to believe that we're now almost Thank you for joining us today. as we work through this pandemic.

2:25 But before we get started with the primary agenda Brian just talked about on the call, I want to touch on some issues that we believe are important at Essential. First, social justice issues have been the primary focus of the country really this summer. This is a topic that should be a key topic or a key focus of good companies and good people. Long before the events of this summer, I'm proud of the work that we've done and continue to do at ACWA now at Essential to ensure that we have a diverse and inclusive workforce at the company. I'll tell you, this journey began at the top. We built our board where more than 50% of our members are diverse, either racially or by gender. Our work continues as we try to make our workforce reflect the demographics of the communities we serve.

3:23 An example, today 22% of our workforce is black or brown versus the industry average of 16%. We've supplemented this work by creating black employee resource groups and women's employee resource groups among others. Our work to make our management team more diverse has also been a key focus. Today, at the senior levels of the company, nearly half of my direct reports are women. And just this year, we've hired several people of color in key management roles. In addition, we continue to work to diversify our supplier network. We've got a strong program to bring diverse suppliers into our network in all aspects of our work, including professional services.

4:13 I want to highlight this Thank you. Thank you. and elected officials. We've all been reading about some of the events occurring in Illinois and Ohio over the last series of months. It's important for you as our investors to know that we pride ourselves in living up to the three core values that we've posted, frankly, in all of our buildings across our company.

5:05 And among the three values is integrity. I want to assure you that Essential has processes in place to review, approve and continuously monitor charitable giving, political giving, and lobbying activities. We remain confident that we're in full compliance with all governing laws and regulations. I'm also confident that our leadership team and our employees have made compliance with the law a central principle in the work we do with elected and appointed officials across our 10 state footprint. Also, for your reference, we've posted our corporate foundation giving policies on our website in our ESG pair sheets in case you're interested.

5:55 Finally, the last issue I want to mention before we jump into the agenda, we've been closely monitoring the infrastructure package that the U.S. House earlier this summer looked at. and any time the federal government focuses on water and wastewater infrastructure, we consider it a good thing because it elevates the importance of the work we do. That being said, the regulated water industry is working proactively to work to make sure that our customers benefit in the same way that customers of municipal water systems would benefit from any legislation that were to pass either in the Congress or in our states. All right, with that, let's talk about the second quarter. I'm really happy to report on our continued progress on our objectives.

6:41 So far, we've invested $346.6 million in infrastructure in the communities we serve during the first six months of the year. Of that $346.6 million, $217.6 million of it was invested in our regulated water segment, and $129 million was invested in our regulated natural gas segment. Importantly, you should note that $53.5 million was invested by Peebles in the first quarter pre-closing. Now, despite the brief COVID-related pause in construction back in mid-March, we remain on track for record capital spending of $950 million this year. Our work on the Goodwin Tomball gas gathering system is also well underway.

7:32 I know many of you will recall this was an important topic during our regulatory approval process, and we're happy to say we're on schedule there. As a reminder, we have approximately 2,700 miles of natural gas pipe to replace, which will be done through the Pennsylvania Public Utility Commission's Long-Term Infrastructure Improvement Program. Many of you know that as the LTIP. The Pipe Replacement Program is very effective in our efforts to also reduce methane emissions in the environment. We'll begin to report on that in the coming months and years. We said in February that once we owned Peeples, we would quickly elect and implement tax repair. I want to report that we elected the tax repair soon after we closed in March by filing our paperwork with the IRS.

8:26 We also told you that we would file with the Pennsylvania Public Utility Commission this summer for treatment of the catch-up portion of the tax repair. That has been accomplished as of just today. On the next box over, you'll notice that net income per share on a GAAP basis increased 16% compared to the same period last year. Dan's going to give you a lot more detail and an overview of the strong performance we achieved in the first full quarter of our ownership of Peoples, as well as we'll give you a reaffirmation on our annual earnings per share guidance range of $1.53 to $1.58. Now, our municipal acquisition strategy remains strong with signed municipal agreements totaling over $300 million in expected rate base and over 200,000 new customers.

9:21 We also announced the closing of East Norton in Pennsylvania. adding almost 5,000 customers and 21 million in rate base. Finally, another milestone for the quarter included the announcement of our first fair market value acquisition in Texas. I think most of you will recall that the fair market value legislation passed just last year in 2019. Matt will give you some details on that in just a few moments. Finally, Tuesday of this week, The Board approved a 7% dividend increase, which marks the 29th consecutive year of dividend increases. You can see here on the next slide, the announced 7% dividend increase marks the 30th increase in 29 years and the 75th consecutive year of quarterly dividend payments, something we are very proud of at our company.

10:14 Following the increase, the annualized dividend rate will be just over a dollar per share, We take great pride in our long, consistent record of delivering shareholder value. We also believe that our dividend policy is indicative of our financial strength. I would say the board's action is a reflection of their confidence, not only in our strategy, but also in our execution. This next slide is an important one. I'm really proud of the leadership team that we have at People's, and I want to take a couple of minutes make sure you understand what's happening with our management team there. We announced in July that Joe Gregorini, the president of Peoples, is going to retire effective September 1st. Joe's been with Peoples for 33 years and has really made significant contributions to the organization and the community as well throughout his career. His influence on the company will continue long after he retires.

11:17 I know I speak for all the employees and saying how thankful I am to Joe for his leadership over the years and especially over the past four months since closing when we've had to deal with the onset of the pandemic as well as all of the integration work. Joe's leadership has been outstanding. And while I'm sorry to see Joe's tenure end, I wish him and his family the best in his well-deserved retirement. Now recently, after conducting a national search We announced that Mike Huwar will be Joe's successor at Peoples as President. Mike most recently served as President and Chief Operating Officer of Columbia Gases Pennsylvania and Maryland Utilities and is a long-time resident of the Pittsburgh community, so he's right at home in the new job.

12:11 He comes to Peoples after more than 34 years with Columbia, which is a subsidiary of NYSORCE. Mike is a true professional, proven operator, and is really well-known and well-respected at the Pennsylvania PUC. We're very fortunate to have Mike on board leading our gas company. Now in June, we also announced the appointment of Mike Torzai as General Counsel for Peoples and Kim Edwardson as Vice President of Finance for Peoples. Mike Torzai is also a native of southwestern Pennsylvania and spent the last 10 terms in the Pennsylvania Legislature, including his last three terms as Speaker of the House here in Pennsylvania. Throughout Mike's career, he's focused on creating jobs across the state and across various industries. Mike's had a law degree from Duke and was a prosecutor before holding elected office, and he's already hit the ground running, very strong general counsel, and will help take the company to the next level.

13:13 Kim Edgerton brings more than 30 years of extensive experience Most recently, Kim was vice president and controller for HM Health Solutions there in Pittsburgh, and her general industry experience and background as a former auditor make her a great fit to lead the finance team for our regulated natural gas segment. Now that we have the full team in place, we're looking forward to supporting them as they focus on continued employee customer safety, ramped up capital plan, and the same solid dedication to our core mission. With that, Dan, let me turn it to you for our financial results. Thanks, Chris. Good morning, everyone. The second quarter ended with revenues of $384.5 million, up 75.6%.

13:59 The People's Acquisition contributed $149.6 million of this revenue growth, while the remainder was largely due to rate increases, volume and growth in our regulated water segment. O&M increased to $128.6 million in the second quarter, up 48.8% from $86.4 million last year. This was primarily a result of the addition of the People's Operations and Maintenance expenses, which we'll discuss further when we show the O&M waterfall. Net income was up 35.9% year-over-year from $54.9 million to $74.6 million, and GAAP EPS was up 16% to 29 cents. Although there's been little financial impact, we continue to closely monitor the COVID-19 impacts on our business, considering a number of metrics, including consumption and billing, collections, O&M, and capital expenditures, some of which we'll discuss later in the presentation.

14:58 Let's walk through the details in the following waterfall slides, starting with revenue. As we go through the 75.6% revenue increase for the second quarter, you'll notice that new revenue related to Peoples, which closed in March, was the main driver, adding almost $150 million. Rates and surcharges, increased volume, and growth from our regulated water segment provided an additional $16.4 million towards the revenue increase, which was offset slightly by other items of less than half a million dollars. Next, we'd like to provide a more detailed look at water consumption by customer class as it directly correlates to the increased revenues for the quarter. As you saw in the revenue waterfall, we did not experience an overall negative impact to revenue from COVID-19.

15:44 Year-over-year water usage was up slightly over last year, but where the water consumption occurred changed dramatically. With many customers working from home and favorable weather conditions, Residential usage was very strong, up nearly 10%, which offset significant declines in most of our other customer classes. While commercial and industrial are suffering, it appears that both indoor and outdoor usage at our customers' homes are strong. As we've discussed previously, given the shutoff moratoria that states and acted when COVID-19 emerged in March, we're closely monitoring incremental increases in our bad debt expenses. We're glad to see that many states, including our larger ones, have indicated a willingness to explore regulatory asset treatment for incremental bad debt linked to COVID-19.

16:33 Lastly, you'll recall that we secured a $500 million term loan in the early weeks of the COVID-19 pandemic as a precautionary liquidity measure, as did many of our peers. We're pleased to report that in June, we paid back the term loan, subsequent to our mid-April $1.1 billion long-term financing, and a couple months of financial performance after the work from home orders began. With that, we'll move to the O&M waterfall. Operations and maintenance expenses were $128.6 million for the second quarter compared to $86.4 million in the second quarter of 2019. The main driver was the $52.8 million addition of People's O&M. Other contributing drivers were employee-related costs of $1.6 million, acquisition and organic growth of $838,000 and increased production costs of $215,000.

17:28 Excluding the people's impacts, both transaction-related costs and O&M expenses, as well as growth, O&M would have been up 1.8% on a comparative basis to last year. COVID-19 is not currently impacting our O&M in a significant way. We are seeing savings in certain areas, such as travel-related activities, which offset some of the COVID-19 related expenses like personal protective equipment, cleaning, and supplies. Next, we'll take a look at the earnings per share waterfall. Gap EPS in the second quarter increased by 16% to 29 cents from 25 cents in 2019. People's transaction costs contributed 7 cents. Growth, net of the dilutive effect from the equity offering, added 3.6 cents.

18:14 and regulated water segment rates and surcharges, volume and expenses together contributed almost $0.04 to the increase. The decrease of $0.10 from other items, such as increased depreciation, amortization and interest, as well as decreased Aqua Pennsylvania tax repair benefit, brought us to a gap of $0.29 for Q2 of 2020. In the next slide, we want to take a moment to discuss the net income by quarter. This is a slide that we presented at our investor day in February. We just wanted to bring it back and discuss net income volatility by quarter, given the strong performance of the current quarter and expectations going forward. The intent of this slide was to assist our investors in constructing quarterly projections due to the lack of historical comparisons and the many moving pieces as a result of the transaction and our new utility mix.

19:09 As you may recall, as a regulated water utility, there was limited seasonality and the summer months of Q3 historically provided for our strongest results in terms of net income, and we typically only saw movement of a few pennies due to weather. As a combined company, including a regulated water segment and a regulated natural gas segment, we anticipate that the highest earnings will shift to the first and fourth quarters going forward. This is, of course, a result of the dramatic impacts of weather measured in heating-dirty days on a natural gas utility's results. Let's take a look at the bars and the ranges on the slide. We reported adjusted income per share on a non-GAAP basis for Q1 at $0.60, which falls just slightly below the middle of the light blue range on the first quarter bar.

19:56 We were reporting $0.29 for Q2, largely as a result of the greater number of heat injury days, specifically in April, and favorable water consumption. Thus, we were at the high end of the range expected for the second quarter. As we look forward to the third quarter, we'd like to reiterate the natural falloff of gas consumption will push us to the lower end of the light blue range for Q3, which suggests a result just above $0.20 in earnings per share for Q3. And while no one can predict what the weather will be in the fourth quarter, we anticipate that we'll be right in the middle of the 25% to 35% range illustrated on the slide. Given our first half results and current projections, we remain confident in achieving full-year earnings per share in our guidance range of $1.53 to $1.58 on an adjusted pro forma basis.

20:50 Moving on to rate activity. In 2020 so far, we've completed rate cases or surcharges for our regulated water segment in Illinois, Indiana, North Carolina, Ohio, Virginia, and Pennsylvania, totaling annualized revenue of $10.2 million. In our regulated natural gas segment, we've completed surcharge filings in Kentucky and Pennsylvania with total annualized revenues of $1 million. In the coming months, we expect to receive new base rates or surcharges in New Jersey, Virginia, North Carolina, and Ohio for our regulated water segments. And at this point in the year, we do not have any pending base rates or surcharges for our regulated natural gas segment. Fortunately, our relatively limited rate case, sorry, Fortunately, our relatively limited rate-related activity remains on track during COVID-19 due to technology and continual virtual interactions with our regulators and counterparties.

21:47 As previously reported, we elected the Repair Tax Accounting Method change in late March of this year for the People's Natural Gas subsidiary, our largest natural gas subsidiary with about 633,000 connections. In terms of its impact for the second quarter, the tax repair benefits reduced income tax expense by $5.3 million. We're pleased to announce that this morning we filed a petition with the Pennsylvania PUC requesting accounting treatment for the approximately $380 million catch-up deduction for capital invested prior to Essentials ownership of Peoples. Our proposal includes a sharing of the catch-up tax benefits between our customers and our shareholders. As proposed, it would benefit all parties by extending the time until the next base rate case.

22:37 As such, we wouldn't envision it changing our expected annual earnings growth rate of 5% to 7%. In terms of regulatory procedure, we expect this filing to be processed over a timeline similar to that of a rate proceeding. And finally, as we've discussed on previous calls, we continue to look for the right time to issue approximately $300 million of equity this year. That equity, as you may recall from Investor Day, is necessary to appropriately capitalize Delcorra and other acquisitions in the pipeline. Next, I'd like to turn the call over to Matt Rhodes for an update on strategy and corporate development. Matt? Thank you, Dan. Essential has been able to provide continuous water, wastewater, and natural gas service to the 5 million people we serve during this challenging COVID-19 pandemic.

23:23 In this environment and during these uncertain times, The company remains strongly positioned to play an important role in solving today's infrastructure challenges and supporting our mission of delivering safe and reliable natural resources that are essential to everyday life. Many of you are familiar with this slide and we continue to believe that utilizing this strategy, which leverages our core competencies, is best for our company and differentiates essential in the marketplace. As we think about growth, We have very sizable capital opportunities to grow rate-based. The water business has a robust internal CapEx program that is continuously backfilled by new capital needs through our municipal acquisition program, which has a proven track record of success. Our municipal program has been our growth engine over the last several years, and we expect it to remain our primary focus for consistent year-over-year customer growth and rate-based growth as capital investments are needed.

24:22 We continue to see significant water and wastewater municipal transaction opportunities of varying sizes, which is why our Water and Wastewater Municipal Initiative remains our top priority for growth. As we have said, the People's Transaction was a unique and strategic opportunity because it is a pure-play gas LDC located predominantly in Pennsylvania, and it has significant infrastructure investment needs, which drives organic growth. As we have previously discussed, the nearly 2,700 miles of identified pipe replacement is quite unique considering many gas LDCs have already completed their pipeline replacement programs. We are pleased with the existing rate-based mix of our utility platforms at approximately 70% water and 30% gas. In fact, we would be happy to see the contribution from water increase because that would mean we have been successful in our municipal acquisition programs. We will continue to be very strategic and selective as we consider future acquisitions.

25:25 The final prong of our growth strategy is market-based opportunities, or MBAs, which are non-utility businesses. While there are a few of these businesses within Essential today, in total they contribute only about 1% of our net income. These include home warranty businesses, investments in microgrids and combined heat and power projects, and others which are complementary to the existing utility business and often have environmental benefits. I will discuss two of these projects in more detail a little later. Moving to the next slide. We continue to discuss the importance of fair market value legislation as we position our company as a solution to municipal leaders. On our last call, we were happy to report that this legislation is now available in all eight states where we currently serve customers in our regulated water segment.

26:15 As Chris mentioned earlier in the call, we recently announced our first fair market value acquisition in Texas, which I will discuss on the next slide. This slide represents acquisitions for our regulated water segment. So far this year, we have closed the Campbell Water System in Ohio, the East Norton Wastewater System in Pennsylvania, and continued to advance the New Garden, Rockwell Utilities, Commons Water, and Delcorra transactions. The signed agreement with Commons Water represents our first fair market value transaction following the 2019 implementation of fair market value legislation in Texas, and it consists of approximately 1,000 customers located in the Houston suburbs. Regarding Delcorra, our transaction continues to move forward with the Pennsylvania PUC regulatory approval process.

27:06 Just last week, we reached the milestone of the PUC fully accepting our application. There has been some news in the local media about legal challenges to the transaction, but we continue to believe we have an enforceable and legally binding contract with Delcorra. We expect the transaction to close in early 2021. We have not experienced any major delays in the regulatory approval process due to COVID-19 and continue to closely monitor our regulatory proceedings. During this COVID-19 crisis, we've ramped up communications with our regulators, So we can work together to keep our regulatory activities on track. We continue to see a strong pipeline of municipal acquisitions, especially given the passage of fair market value legislation. And now with economic pressures as the COVID-19 crisis continues, we're anticipating more municipalities will be looking for solutions to financial constraints. We stand ready to partner with these towns and cities on their water and wastewater utilities so that they can focus on other vital municipal programs and community projects.

28:10 Moving to the next slide. In addition to our signed municipal acquisitions, we have a healthy pipeline of potential municipal deals. To be included as part of our pipeline means that we are having active discussions with the municipality. As illustrated on this slide, we are actively pursuing acquisition opportunities totaling approximately 365,000 customers. Again, many of our recent municipal acquisitions have been wastewater assets rather than water, given the operation and compliance of wastewater assets can be more difficult for some municipalities to manage. We see the same trend in our pipeline with the majority of the potential customer additions coming from wastewater systems which are effectively regulated the same way as water systems. Next, similar to how we look for acquisition opportunities, it is important that we look for partnership opportunities in the communities that we serve.

29:03 One of the community partnerships we would like to highlight on this slide is the Pittsburgh International Airport microgrid project, which People's Gas will build, maintain, and operate. Through the use of onsite natural gas and solar, Pittsburgh will be the first major airport in the U.S. completely powered by its own microgrid, which is an independent electricity source. The airport will remain connected to the main electrical grid for emergency backup, but this project will allow increased reliability, public safety, and lower emissions. while achieving cost savings for both the airport and its tenants. Through the use of five generators, which use on-site natural gas supplied by people, and approximately 7,800 solar panels, Microgrid will produce an equivalent amount of electricity needed to power more than 13,000 homes.

29:55 The project ensures a more efficient, environmentally sustainable, and resilient energy source for the airport using local natural resources. In addition, PEOPLES has also formed a partnership with Allegheny Health Network to build, maintain, and operate a combined heat and power project, also known as CHP, at the Wexford Hospital. The project will be more energy efficient and provide electricity, hot water, chilled water, and steam to meet all the power, heating, and cooling needs of the hospital. This will reduce costs and improve reliability for the hospital, and importantly, will reduce emissions. We believe the project is the first of its kind for a hospital in the region. And with that, I'll hand it back over to Chris.

30:42 Thanks, Matt. Appreciate it. You know, earlier this year, during our Investor Day, we presented our 2020 priorities. We said that we would remain focused on operational excellence, the integration of peoples, and the continued focus on the Del Cora transaction process. We said we would remain committed to our municipal acquisition program, that we implement our accelerated people's CapEx plan, including the election of repair. Of course, at the time, we didn't know that we would be facing a pandemic, but despite our work to overcome the pandemic, we've remained focused on this core agenda and remain committed to delivering on all of the priorities. In addition to these priorities, we also continue our focus on ESG initiatives.

31:32 Recently, we hired a a manager of ESG, John Catalano who is focused on overall ESG program of work every day and that's all he thinks about. Later this month we'll be filing our annual CDP survey and we anticipate publishing our updated ESG report later this fall. I continue to believe that we have a strong ESG story to tell. and John and the team are working to take our ESG work to the next level. With that, let's talk about guidance. We are reaffirming our 2020 guidance, recognizing that we're not completely out of the pandemic. However, we believe the company's current position will allow us to continue to deliver strong results for the remainder of the year.

32:25 adjusted income is still expected to be $1.53 to $1.58 per share on a pro forma basis for 2020. Dan spent some time providing you insight into where that falls in the various quarters. This is important to think about, especially as you do your work for the third quarter projections, so hopefully that chart is helpful to you. Our capital plans remain on track as we anticipate spending approximately $550 million on the regulated water segment and approximately $400 million on the regulated natural gas segment. We anticipate investing approximately $2.8 billion across the essential platform through 2022, driving rate-based growth on the water side up 6% to 7% and driving rate-based growth on the natural gas segment up 8% to 10%.

33:21 Lastly, we expect annual customer growth to be about 2% to 3% on average for our regulated water segment. And with that, let's open it up for questions. Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. And if you're using speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. and we'll go to our first question from Ryan Greenwald of Bank of America. Good morning, Ryan. Good morning, guys. Appreciate your time this morning. Can you provide a bit more color just around the acquisition platform in Texas following the latest announcement, the magnitude of opportunity there and the efforts underway in the state and just kind of what you're seeing in terms of the competitive landscape?

34:20 We're very optimistic about opportunities in Texas. As we talked about on the call, we just announced our first fair market value deal there. It was an investor-owned utility with about 1,000 customers. We see other investor-owned utility opportunities, other municipal opportunities there. Now that we have fair market value in Texas, we really expect and hope that it opens up. It's a big focus of ours. We have business development people in the state of Texas that are working actively, having discussions. So we do think there's additional opportunity there. Texas is an interesting place because you have municipal utility districts as well, particularly around the Houston area. So it makes it a bit of a different animal than what we experience in some other states. And so we've been working hard to open the market there.

35:08 And I'm with Matt. I think the FMV legislation will see it more and increased activity in the state. Got it. And then more broadly, just kind of thinking across the rest of your jurisdictions on the water side, Any particular states where you're seeing the most opportunities or particular states that are standing out where it's most competitive? Yeah, we continue to see a lot of activity in Pennsylvania and also in places like Illinois and now in Ohio. Not coincidentally, we've had fair market value the longest in Illinois and Pennsylvania, and so that's part of the reason we see A lot of continued activity there. But given we now have fair market value in all of our states, we're starting to see additional activity in places like Texas and Virginia and North Carolina as well.

36:01 So while Pennsylvania probably is still our busiest state, we're definitely seeing more activity across our other states as well. And importantly, we're trying to add new tactics as we approach and make our solutions available to the various municipalities that need us, especially at this time when we know that more and more municipalities are strapped for cash. and so, you know, for example, we're making offers where we just think that the municipal is in trouble or needs help. We'll knock on the door and actually offer to buy their system as opposed to, you know, get a call early for an RFP. So I think you'll see increased sales tactics as we move into this period to offer, better offer our solutions on a proactive way.

36:51 Got it. And then just lastly, in terms of the catch-up component file this morning, it sounds like you're not kind of changing the 5% to 7% longer-term guidance there, but are you able to provide a bit more granularity in terms of the contribution on an EPS basis that could materialize out of that? It's hard to do at this time. What we're doing, Ryan, is really proposing a concept here, a construct, where that catch-up deduction of benefit from it would be shared between the customers and the shareholders. And you can imagine customers getting like a short credit on their bill to reduce their bill over a period of time. And then to benefit the shareholders, really what we'd look for is the ability to bring some of that back later to extend the time until the next rate case. And when I say extend the time until the next rate case, you might say, well, that benefits customers too. And I would say you're absolutely right.

37:47 You know, that's what we have a proposal in for. And, you know, it's newly filed. It's kind of an open matter. Now it's Pennsylvania PUC. So we probably can't provide really any more color on it than that. Fair enough. Appreciate the time. Yep. Thanks, Ryan. And we'll go to our next question from Ryan Connors of Owning and Sattergood. Hey, Ryan. Morning, yeah, thanks for taking my questions. So I wonder if you could give us any regulatory update on the issue of the service disconnection moratoriums in Pennsylvania. I know the PUC split on that issue back in June, but they had a public meeting this morning, and I didn't hear it come up at all.

38:36 So any update on when they might expect to move on that one way or the other, extending it or rolling that back? Yeah, I think it's an important question. I guess the good news, even before I get into the timing, the good news is Pennsylvania has provided some relief in the form that they'll allow a regulatory asset for COVID-related debt expense. So, Ryan, from that standpoint, it's still a cash flow issue, but it's not necessarily a P&L issue long term. And hopefully, frankly, we hope customers pay their bill and it won't be an issue at all. But in terms of being able to enforce a shutoff for non-pay, you know, the commission has brought it up two times to my knowledge, and each time the commission has been split two-two.

39:28 We're still missing a fifth commissioner. When Commissioner Place retired from office, we don't have a fifth commissioner now. The governor just sent over a name to the Senate this week. Haley Book, and so we'll see how that develops. But the best estimate, I think, is that we would see some action by the Commission in the September timeframe. Remember, there comes into a winter moratorium later in the fall, call that the December timeframe, where we're again faced with no shutoffs on the water side for water-related heat and certainly on the gas side. So these are considerations that I think the Commission would think about and allow some period between the September time frame and the moratorium, the winter moratorium, to be able to clean up some of the bad debt issues. That's the best I can give you, Ryan.

40:27 Got it. Okay. And that kind of dovetails into my other question, which is somewhat big picture in nature. I mean, you mentioned it's Cashflow issue, not an earnings issue, but the longer it goes on, the bigger the risk that it becomes an earnings issue. So I guess my other question is sort of, it seems to me like when you look at the overall regulatory dynamics with COVID, it seems like the water utilities have been caught in the middle here. On the one hand, you're an essential service, no pun intended, so you've got to keep operating, which costs money. And then on the other hand, any kind of monetization, whether it's a rate case, whether it's You know, collections and shutoffs, you know, that's sort of a third rail right now. So what's your reaction to that and what can be done to sort of help turn the tide and bring some balance back into the regulatory compact if, in fact, you know, this thing in terms of the job market and unemployment and household impact does end up going on for, you know, another year or more?

41:23 You know, what's being done to kind of balance some of that out? Yeah, well, you know, let me start with saying, you know, we are – We've always focused on affordability for our customers. We'll start with that. We understand what a lot of American families are going through right now. We've eased a lot of issues. Thank you very much. with more surgically and not with a blunt instrument.

42:19 What I mean by that is a broad moratorium probably isn't as effective. It's important that we give customers who need it the help that they need. On the other hand, customers who take advantage of it, there needs to be some discipline. And so we continue to advocate commission by commission for a more surgical approach rather than an approach where it's a broad moratorium. So all I can say, Ryan, now we're in 10 states, state by state. We're in those conversations. Two of our states have already gone that way and reinstituted the collections, and that would be West Virginia and Texas. And then we have four more states who are lifting their restrictions in August.

43:05 And then it looks like the remaining four would be sometime in September, to the best of our knowledge. But those conversations continue in each of our states. Got it. Okay. And just one more. Just going back to the prior question there on the municipal acquisition pipeline, it definitely seems like you're sort of punching very much at or above your weight in terms of your pipeline and your deal flow and then sort of outpacing the industry. You've really pulled ahead, especially it seems like in Pennsylvania, which is pretty impressive given it's a very competitive market. And you look at the local press reports indicate there might be more on the way there. So what are the factors that are enabling that? What is it about your process that you think is giving you that edge? Or do you think that's just timing and that you're on a hot streak and that'll all even out over time?

43:57 It's all management, Brian. I'm kidding, of course. But listen, we stay at it pretty hard. I think the offerings we have, and let's face it too, we have a nice reputation in the area that we serve. We work really, really hard with our communities, and so that reputation is long built, right? And so some of these transactions we're talking about are right on top of the water customers we currently have. So that gives us a little bit of an inherent advantage given our location and our reputation. But beyond that, all of these deals are political at one level or another, some more than others, and there are various opinions. And the larger they get, and as you know, we're doing larger and larger municipal transactions now, the larger they get, the more people have opinions. and so I think the nature of these things is we're going to have to just kind of stay the course and as we've done with Delcora, file it, make sure we've got all the necessary documentation for the commission and allow people to participate in that process as they see fit and oppose it if they need to but let the regulators and legal Judges, in some cases, determine ultimately what the outcome is.

45:16 But listen, as they get bigger, we're going to see more and more people have an interest and take a position, and that's just the nature of these things. But we're confident we'll continue to close them. Great. Well, hey, thanks for all the detail, and thanks for your time. Yep, you bet. Thank you, Ryan. And moving on, we'll go to a question from Drijesh Chopra of Evercore ISI. Hey, guys. Good morning. Thank you for taking my question and a very, very solid quarter. Maybe just can I start off with one of your peers actually mentioned COVID impacts and they're seeing, you know, pretty chill earnings impacts from COVID. Can you just maybe help us understand how much was weather affected and offset to the extent that you can during the quarter.

46:11 And what are you seeing in terms of, you know, normalized commercial industrial declines? Yeah, absolutely. I mean, I think if we think about weather, you know, weather was helpful for us. And, you know, you saw it certainly in the Mid-Atlantic. And we would think, too. What you see with some of this work from home is people have taken care of their lawns, they're now watering their lawns, and the weather's been conducive to keep that watering up. So that could be for us as much as a couple pennies of incremental earnings here. And so that is helpful, but I'd say in terms of when we identify the actual COVID impacts and PPE and cleaning expenses and things like that, They're relatively modest numbers that are in the O&M waterfall we showed earlier.

47:04 So they're not big figures put into there. And then, as we did say, there's a bit of an offset because we've effectively stopped our travel. So you're not seeing people traveling between our eight or ten states now. We're not going to conferences. As you know, you haven't seen Brian and Chris, myself, or Matt at any investor conferences, right? We've stopped that. So there are some savings there that help to offset those expenses as well. Understood. And, yeah, I haven't seen you guys in MSU for the record. But in terms of the declines, actual demand declines, anything, I mean, obviously, largely residential footprint, nothing alarming there, I'm guessing, right? I mean, in terms of what you're seeing so far.

47:52 No, I think that's kind of what we expected going in before we saw the data. And then as we said right on our last call, in our last call we had just gotten the April numbers and said we were basically kind of coming in on budget for April. So by that point we had started to see this, that the residential was making up for the declines in commercial, industrial, and other segments or other customer classes. So what we wanted to show here is just quantitatively put that on the slide and let you see exactly what's going on there so far during this period. and many more. And certainly, as you look at this, probably some of that happened, but it doesn't appear to be as bad as maybe it could have been, at least in our area.

48:59 And that's going to vary company to company and jurisdiction to jurisdiction, as I said. Understood. Very helpful. In terms of just the equity issuance timing on Delcor, why do it this year? Why not just wait for the deal and do it subsequently? Any thoughts around that front? A lot to think about on that, right? Yeah. A lot to think about on timing. So, Dan, you want to go through how we're thinking about it? Yeah, a little bit. And, you know, Dragesh, they say, you know, don't wait to raise money to the point where you really need it, right? So as we think about it, the Del Cora closing and how do you kind of get ahead of that and make sure that we're ready for it, you know, just want to make sure that we pick the right time here in this back half of the year to raise that equity and As you know, if you look too far out here, you start to see the election, and who knows from an equity market perspective kind of what happens around that.

49:58 I think that's right. You know, the economy, what happens with the economy if COVID continues into next year? There's just a lot of events that could cause some volatility. So I think we're going to be opportunistic in terms of timing and do the best we can in the equity race. Understood. Thank you. And just one quick follow-up, hopefully, for Matt. In terms of MBAs, very, very interesting. But, you know, how are you – is this going to be a business model which is going to be capital-like, contract-led businesses, or you plan on deploying balance sheet there, too? Just any color on that front would be great, Matt. Yeah, the – I would say it's a mix.

50:43 People, for instance, they have a few different MBAs. One is a home warranty business, which is very capital-light. It's a fast-growing business, and we like the business, but it doesn't require much capital. On the other hand, they're doing projects like the Pittsburgh Airport and CHP projects at hospitals, which are more capital-intensive. They spend the capital. They basically... developed those projects and managed them. And so, you know, those are definitely a little bit more capital intensive. So it's a little bit of a mixed bag depending on the business at both people's and at ACWA. Understood. Appreciate that, Colleen, guys. Be safe and thank you so much. Thanks, Ragesh. Take care.

51:31 And we'll move to Angie of Seaport Global. Thank you. So I have two questions. One is that so far, we're seeing the impact of COVID mostly related to your customer class mix, right, being that residential customers are consuming more on just a normal weather basis. And that also depends on the CNI side. Now, Just like we hope, or at least we hope to see on the electric side, I would argue that COVID should make your weather sensitivity higher, right? Because there's one, there's a change in the customer mix, but also this residential customer is more reactive seemingly to the weather, both of the water side and the gas side.

52:28 So what I'm trying to say that is there actually a scenario where, you know, given what we've seen so far this summer and, you know, assuming that the winter is going to be at least normal, we could have actually a weather benefit both on the water side and the gas side, which would be, you know, not only offsetting COVID but also additive to your guidance. Well, you know, from your lips to God's ears, right? These things are hard to predict. I mean, I think a couple of your suppositions there are accurate. That is, more people are at home, so therefore probably more people have done yard work, planted things this year, and are watering their lawns than before.

53:17 So I think all those things are accurate. As they get their bills and move their way through the summer, will they continue at that rate? That's a question. Do I get my bill and maybe one of my spouse is out of work and so we're looking at trimming expenses. So we just don't know, Angie. I think our best estimate at this point is right within that guidance range that we've described. And could there be upside? I guess potentially, but in our best estimate at this point, we're within the guidance range. Okay. And secondly, I know that you have just filed this catch-up repair tax application, but and even if there is a sharing mechanism, I don't think that we were expecting you to file another rate case on the GAF side through 2022.

54:12 And so, again, as long as the sharing leaves anything for shareholders, that should still be EPS additive versus the original plan, no? I guess the way I'd say this is, you know, We've made a proposal in such a way that we would be stretching the time until the next rate case beyond what you were expecting. So going farther out from there and, frankly, farther out than what we would have planned by using some of that benefit to, in that later period, make up for what you'd call a revenue requirement shortfall. Due to the continued heavy capital spend. Due to continued heavy capital spend over that period of time. So, you know... We see it really driving this extended period between the last rate case and the next rate case, which we think is really good for all stakeholders.

55:08 Okay. And lastly, I know that this question was already asked. I mean, you guys are not showing any net impact of COVID or negative impact of COVID on your earnings. In that context, You know, year-to-date estimate and assertion for the remainder of the year. Are you assuming that Pennsylvania allows you to defer any COVID-related expenses, both basically expenses and bad debt? On bad debt, we're assuming that we get some treatment on COVID-related bad debt expense, right? That's a regulatory asset. And that's a commission that already issued guidance on that. So, on bad debt expense, but not on other COVID-related expenses.

55:57 We think we can offset those with other opportunities for savings associated with COVID and not associated with COVID. We think there's opportunity to basically hit our numbers without damage from the COVID-related expenses. Okay. Thank you. Sure. Thanks, Andrew. As a reminder, you may press star 1 on your telephone keypad if you do have a question at this time. And we'll go to Jonathan Reeder of Wells Fargo. Hey, Jonathan. Good morning. How are you all? Pretty well. How about you? Oh, not too bad. Getting close to the tail end of Vernon, the light at the end of the tunnel.

56:44 Right, right. Yeah. Dan, can you reiterate what the size of the repairs text Catch-up filing was, and is that the amount of income that it shielded, or is that the net income impact? So it's $380 million, approximately $380, and that is the deduction. So the benefit is effectively a tax rate multiplied by that deduction. Got it. And that benefit is then what flows through the income statement. Okay. Right. Okay. And so then the portion that you request to accrue to shareholders, I mean, it sounds like are you asking the flexibility to recognize this as needed to keep, you know, your earned ROE consistent with the allowed levels as opposed to, you know, some sort of predetermined amortization over a multi-year period like was done on the water side?

57:43 Yeah. It's a bit of that predetermined, but I think, you know, time will tell here. This is As I said earlier, this is now an open matter in front of the PUC, and I just want to be respectful of that process in terms of how it is actually adjudicated. But I think just to maybe put it in a little bit bigger box, I think we could say Jonathan's thinking about it the right way. Yeah, Jonathan, you are thinking about it the right way. I would agree. Okay, and then is the request, has that been shaped by any, like, relevant discussions you've had with regulators or key interveners over the past few months? Or, you know, is this just purely presenting it to them for the first time and see how they react?

58:29 Well, I have to compliment Dan and Kim and the team. Well, I wouldn't say that I wouldn't characterize it as we've been guided by the regulator on how to file. I would say that they wouldn't be surprised by what they saw. Is that correct? Yes, that's correct, Chris. We've had very good conversations and socialized this concept with the various parties in advance. We try to create something, Jonathan, that is a win for everybody long-term and short-term that we're – It really helps, too.

59:25 It supports the elevated level of capital deployment as well. So, you know, it's that longer stay out plus continued capital deployment to replace pipe to really drive safety and reliability in our system. As we think about the recovery from even COVID here and the economic condition associated with it, We believe the longer we can stay out of rates in the gas utility and at the same time continue to focus on the replacement of a pipe for reliability and for environmental reasons, we think that's the strongest outcome. Yeah, that all makes sense. I appreciate that color. Lastly, I know it's not a fight that you're really in, but you are interested in it. Where do things stand in the whole legal fight between Delcor and the city council or whatever?

1:00:26 So we have filed, as Matt said in his presentation, filed with PUC and they've fully accepted our application. So that's good news. So the process is formally now winding through the PUC and that's a defined time period. So that would take us to call it early 2021 if it stays on this current track. The county now knows that they have At least one of the county commissioners had said to me that they would like to have some of those proceeds for taxpayers as opposed to simply ratepayers.

1:01:20 And listen, at the end of the day, the proceeds from the sale is going to be largely up to the county or made in this trust. and then offset future rate increases because, as you know, and we've communicated, we have about $700 million of capital to spend at Delcorra expanding a plant and redirecting flow. So it's going to be a heavy lift over the next year, eight years. And so we thought the solution was pretty good. But, again, as I said a few moments ago, politics are what they are, and I think people see and the judge in the county to have a ruling sometime in early September, mid-September on what he thinks about the situation. Matt, I don't know if you have anything to add.

1:02:20 Yeah, the only thing I'd add, Jonathan, is there are legal proceedings ongoing, so we can't comment too much. But we do have a signed APA in place, and we're confident that it's a legally binding agreement. And so we continue to progress with that in mind, and hopefully we'll get this transaction closed in early 2021. Okay, but Chris, that judge ruling that you said in mid-September, that would determine whether the county has a right to any of the proceeds or actually spell out maybe what right they have to it. And then, you know, I guess there's whatever appeals. It's more about the proceeds versus the transaction. Yeah, no, I think it's more about whether the county has the right to stop the transaction, right, or whether the county has the right to step in and intervene in a contract that exists. So I think it's a pretty important decision by the judge in September.

1:03:20 Less about the trust and more about the county's ability to dissolve the authority and intervene in the midst of a transaction. Okay. All right. Thanks. I appreciate that clarity. You bet. Thanks, Jonathan. And with no further questions in the queue, I'd like to turn the conference back to Chris Franklin for any additional or closing remarks. Thank you all for joining us this morning. Great questions, and obviously we're available for follow-up if there are any. Brian and Dan and I are all available. Thanks so much. Have a great day. And again, that does conclude the call. We'd like to thank everyone for your participation. You may now disconnect.